The UK housing market has seen such a strong rally in the past year that
prices are now less than 10pc below the peak reached before the financial
crisis, new figures show.

The average UK house price is now 9.5pc below the peak reached in October 2007, according to the latest monthly report from Nationwide Building Society, which showed that prices edged 0.5pc higher last month.

Despite Britain's worst recession since the 1930s, the record low level of interest rates and a relative lack of properties for sale has fuelled a 12.2pc rebound in prices from the trough they reached in February last year. Nationwide said that the current lack of homes for sale is "still consistent with relatively stable to modestly upward trending prices."

The average cost of a home is now £169,162, the highest it's been since July, 2008. The annual rate of house-price inflation is now running at 9.8pc.

However, the building society also warned that the Government's plan to introduce a higher rate of Capital Gains Tax on non-business assets, which could include second homes, may prompt those owners sitting on hefty gains to sell. A flood of sellers is much more likely if an increase in CGT from its current level of 18pc is delayed until next April, giving homeowners a chance to react, said Martin Gahbauer, Nationwide's chief economist.

Whatever happens to CGT, economists are sceptical that the rally in house prices can be sustained. The coalition Government is expected to introduce deep spending cuts at the emergency Budget later this month, and pressure is slowly building on the Bank of England to raise interest rates to tackle inflation.

Howard Archer, an economist at Global Insight, said he expected prices to remain "erratic over the coming months and at best will make very modest gains over the rest of the year. Indeed, we would not be surprised if they were only flat overall through the rest of 2010."